China looks to the future with innovation drive
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China looks to the future with innovation drive

Beijing aims to become world leader in research and development within the next decade

CHINA is climbing the technological chain and is doing so astonishingly fast, data suggests. Figures released by the OECD point out that China’s share in global R&D moved up from 7 percent in 2004 to 13 percent in 2009.  In January this year, quoting a report by the OECD which should be published this month, Nature reported that, “China has for the first time overtaken Europe on a key measure of innovation: the share of its economy devoted to research and development.”

Booz&Co, a management consulting firm, wrote in its ‘2013 China Innovation Survey’ that in 2011 companies headquartered in China increased their R&D spending by 26.5 percent, “more than double the global average, five times as much as European firms, and 11 times as much as Japanese firms.”

According to the Battelle Memorial Institute, the trend is likely to continue. It forecasts that China’s gross expenditure on R&D will rise to 2.0 percent in 2014, up from 1.9 percent in 2013 and 1.8 percent in 2012. This, Batelle said, is because the country realizes that “efficient manufacturing alone is not adequate to maintain economic growth. Recognizing this, China intends to evolve from a manufacturing-centric model in 2013 to an innovation-based economy in 2020.” At least in terms of spending, they may well make it: “Even if the historic stability of the U.S. and European commitment to research intensity (i.e., spending as a percent of GDP) continues, growth in China’s economy is likely to propel it to the top position in absolute R&D spending by the early 2020s.”

Throwing money at research is seemingly paying off in terms of innovation. According to Booz&Co, “China is regaining its historical posi­tion as a global innovation power. The nation that brought the world such inventions as water-powered mills, paper money, and explosives is increasingly viewed as a center of 21st-century innovation excellence.” The firm reported that the number of China-based companies appearing on its Global Innovation 1000 list has moved from 15 to nearly 50 in five years. Last year it had 75 companies in the top 1,000.

According to Reinhilde Veugelers, a professor at the Catholic University of Leuven and senior fellow at Bruegel, “the Chinese government is really trying to make growth more innovation-based. Their main target is giving money to particular sectors where China thinks they can make a big move in global market dominance, like material and computer sciences.”

It would be dangerous, however, to blindly equate R&D and innovation. “Very often we take it for granted that R&D is necessary for innovation, but you also need other complementary inputs such as building up a skilled workforce, complementary assets, etc.” Dr Veugelers contended. “It is much more than just R&D.”

Andrew Snyder-Beattie, a member of the Oxford Martin School, told Asian Correspondent that “investment in research and development can take on two roles – either it can develop entirely novel technologies, or it can improve the ability of firms to integrate preexisting technology into their operations (‘absorptive capacity’).  Many of the returns on China’s R&D expenditure are likely to come from this second category.”

The willingness to improve the quality and performance of the national economy has often created ‘market champions’, companies that can take on the global market thanks to the government’s support. According to Dr Veugelers that is not necessarily a bad thing: “economists don’t usually like these kinds of policies, but if you don’t nurture companies to have a world position they won’t make it. Support for infant firms is important.” The tricky part is to stop providing support when the right moment comes, “or these infant companies will become spoiled, just like a child.”

Some argue that an inefficient reality lurks behind shiny numbers. Guy de Jonquières, senior fellow at the European Centre for International Political Economy (ECIPE), argued in a paper that China’s policies could prove costly in the long run. “The list of China’s achievements to date looks impres­sive,” wrote Mr Jonquières. “It claims already to have installed more DNA sequencing capacity than the US and has recently un­veiled the world’s most powerful supercomputer. Its universities turn out more engineering graduates – about 2 million annually – than any other country, and it is now the biggest recipient of patent applications.”

However, he noted that the strategy chosen by Beijing – which, he said, includes government designation of “strategic” na­tional industries, visionary strategies, and heavy reliance on “national champion” companies – looks sinisterly similar to the one France and other European countries adopted from the 1960s to the 1980s.  There, Mr Jonquières observed, “at best, it achieved few of its commercial objectives and, at worst, ended in costly failures.”

Suntech Power Holdings is an example of what happens when state care turns out to be excessive. The company seemed to be a jewel on the crown of China’s industrial policies: founded in 2001, it quickly became the largest solar panel-maker in the world. Equally quickly, however, its fortunes began to decline: starting from the end of the last decade, overcapacity and declining prices have eroded Suntech’s profitability to the point that company was forced to declare bankruptcy. A sign that, even in high tech, big is not always good.